Small Businesses…

A Way Forward for Small Businesses

It will be years before we fully understand the economic impact of the corona virus, but one thing is painfully clear right now: Small businesses across the country are facing an existential threat. Businesses with fewer than 500 employees account for 48% of jobs and 43.5% of GDP. Yet while these smaller firms are an essential part of the economy, they’re often financially fragile, with little cash on hand or resources to buffer even a minor financial shock. In the throes of the sweeping disruptions caused by the corona virus, businesses around the country have closed temporarily. Many have ongoing expenses and little or no revenue and face the prospect that they may never reopen.

For these small businesses to come back after the pandemic abates, and once again serve as an engine of business innovation, they need aid. The Corona virus Aid, Relief and Economic Security in loans and assistance for small businesses and there may be more to come. But business owners also need to make the best possible decisions to get them through this difficult period.

Over the past few weeks, we’ve been exploring the economic effects of the corona virus on small business and ways to mitigate the economic damage they face. To assess the current landscape, wee ought to understand how small businesses are dealing with the disruption and how long they expect the crisis to last. We should focused in particular on their financial resilience and the challenges they are facing. On top of this, we should involve and talk to and take opinion of  the banks, tech companies, and other organizations to understand how the crisis was impacting their relationships with small businesses.

We should have discussions with business and policy leaders, and the broader academic literature experts, and then sketch a way forward. First, findings about the small business landscape that emerged. Second,a set of steps small businesses can take to better navigate the current crisis.

Findings on the Current Small Business Landscape

1. Large numbers of small businesses have shut down and laid off huge numbers of workers.
45% of small businesses are temporarily closed due to Covid-19. Total employment by these businesses declined by 40% since the end of January. The economic carnage was particularly acute at the epicenter of the Corona pandemic: more than 55% of small businesses had closed and employment had fallen by 44%. The other regions, with statewide closures  and an early outbreak  has seen equally dramatic employment reductions.

The magnitude of the shock to demand for small businesses is hard to overstate. Majority of population was living under some sort of shelter-in-place or stay-at-home order. One week later, roughly 87% of the population was living under a stay at home order. This highlights both the severity of the situation, and the pace at which things are evolving.

2. Most small businesses are extremely cash strapped.

The vast majority of small businesses had less than two months of cash on hand to deal with shocks. The median business with monthly expenses over Rs 10,000.00 generally didn’t even have enough cash to cover two weeks of their spending. These results suggest that without a credit lifeline or cash infusion, businesses will have to either cut their spending drastically or fold.

For banks and policymakers, this highlights the importance of not just getting money to businesses, but also in streamlining operations to the extent possible and getting money to businesses quickly. Delays in deploying aid will likely have a significant negative effect on business resilience.

Roughly 60%  expect to be able to reopen by the end of 2020. However, nearly 30% view it only as somewhat likely that they will be able to reopen, and almost 10% find it unlikely or extremely unlikely that they will be back in business by year end. Businesses with more cash on hand can be more bullish on making it through the year.

This suggests that the targeting of  institutional aid, and the ability of businesses to make other adjustments, will help determine how many businesses will last the year.

4. Small businesses disagree (a lot) about how long the crisis will last.

Perhaps the biggest unknowns for businesses (not to mention the rest of us) is precisely how long the ongoing disruptions will last. More than a third of businesses think that disruptions would be over by June. But another third thought that the disruptions would last beyond August.

This highlights the value of transparency and clear guidance from policymakers about what to expect in terms of disruptions for the months ahead. The government can’t promise that the Covid-19 pandemic will be over by any certain date, but it can be realistic about timelines and also commit to a course of economic medicine that will enable the economy to reopen after then pandemic ends.

5. Many businesses are unsure about whether the loans will work for them.

While many businesses are in dire need of a cash infusion, many businesses do not plan to seek assistance. Businesses were concerned about whether they would qualify. They were unsure about whether they would be able to repay the loans, or whether the government would end up forgiving the loans. They were worried about the complexity of the process and the hassle involved in getting a loan. And they feared that they wouldn’t get the money in time. Their concerns highlight the importance of the loan process and implementation.

Overall, these findings suggest a situation that is challenging, complex, and rapidly evolving. With that in mind, here’s what small business owners should do right now.

Five recommendations for navigating the current crisis

Drawing on our interactions with businesses (both small and large), and the broader academic literature, we propose five steps to help small businesses navigate the current landscape.

1. Don’t rush your decisions, but do make plans.

It is easy to panic when thousands are dying, the stock market is crashing, and unemployment is skyrocketing. Don’t! Research has shown that people are more likely to make mistakes when they are cash strapped and primed to think about financial stressors — a state that describes a lot of people right now. Here are some strategies for making good decisions when the world is in flux.

First, give yourself time to decide. In the current climate it can be tempting to run out and make big decisions — to just do something. Many entrepreneurs like action and refuse to leave something sitting on their desk when they can help it. But that’s a bad strategy when every day reveals a bit more about how the Covid-19 crisis will play out. Everyone makes better decisions when they have better information, and you will have more information tomorrow than you do today. Before making any big leaps, take a cooling off period — and maybe even having a trusted third party such as a friend or colleague look over things with you — might help you avoid doing something you’ll come to regret.

2. Get in line for finance and get ready for applying for it from now.

Though there are concerns over eligibility, when the money would arrive, and whether the current loan would be forgiven or rescheduled  don’t let it stop you from applying like  many other small business owners.

We’ll cut to the chase: If you’re thinking about applying, you should prepare for it from now. The money will be  channeled through the banks and they are already swamped. One major bank reports a queue of 100,000 small businesses asking for money. All of the banks that we have talked to say that they are prioritizing their regular customers. That’s why you should apply immediately. You can take your time to decide whether you want the money later, once they’ve offered you a loan.

As to whether you’re eligible and when the money might arrive, that differs lender by lender, and often can only be resolved by applying for a loan. Whether loans will be rescheduled depends on how you use the money.

3. Figure out how your customers’ needs have changed.

This Covid-19 pandemic is a shock for the whole world. Almost all of your customers’ lives are different than they were a month ago, and they will probably be different again in six months. They may never be the same. Your short-term cash flow depends on providing them with goods and services during the crisis. Your long-term viability depends on understanding how their needs will be different when the pandemic is over.

The first thing to consider is that people are building new habits right now. There are millions of isolated households whose normal routines have been upended, and just like them you have to experiment if you want to remain a part of their lives. Some restaurants are offering takeout comfort food, even if they usually just serve in their dining rooms. Retailers are emphasizing online experiences. Your customers don’t need a vapid email about how you care about them, but they do need entertainment and comfort and hope. Some of their new habits will persist after the pandemic, which means it is particularly important for you to figure out how to continue to offer services that deliver value during the crisis.

Think hard about how the post-pandemic world will change your business model — and bring your customers into your planning process. When many of your customers will be poorer, but they will also be eager to enjoy themselves after the long seclusion. Many will still be scared about the risks of contagious disease. Some of them may have decided that they like ordering online. Reach out to them to learn how their lives have changed and figure out the most exciting thing that you can offer your customers once they can leave their homes. Ask them what they are looking forward to and help them look forward to the day that they can buy from you again.

4. Do some realistic accounting.

Perhaps you can reinvent your business and keep revenues up during the pandemic. Perhaps you can thrive in the post-pandemic world. But most businesses are suffering enormously, and after you’ve searched for creative solutions and have given yourself time to plan, you’re likely going to need to make some hard decisions.

First, try to form realistic estimates of your cash flow both during and after the pandemic. Compare that cash flow with your fixed expenses and with those expenses that you can cut. Remember that sometimes it makes sense to cut the more flexible expenses early, so that you can still keep paying the more vital expenses later.

Next, figure out which expenses can be delayed.  Be transparent to landlords — or whoever you need to pay — about your situation. But be aware that it might not be easy to catch up.

Finally, stay abreast of other forms of public assistance and other ways of bridging the gap as they become available. This landscape is also evolving, and fast. For example, there are a number of new relief grant programs available for small business, provided by organizations including Facebook, Verizon, and Amazon.

5. Keep your best employees loyal.

Your workers are always your most valuable asset. If you lose your best ones during the crisis, rebuilding your operations is going to be even more difficult. Even if you have to cut labor costs dramatically during the crisis, you want to maintain your ability to rehire your best workers when the world is open for business again. The key here is to focus on the long term and to be human.

The small business loans are designed to stop you from firing workers. Use furloughs rather than firing. Talk to your employees about these choices and make sure that the decision feels mutual and temporary. If you do have to make some tough decisions about who you want to keep, focus your attention on retaining people who feel like the best fit and who really care about being part of your company.

Finally, this is a time to be human with people. No matter what happens with your business, this is likely a devastating time for employees for all kinds of reasons. Many of them have elderly relatives, for instance. Do everything you can to make sure that they are safe and to show that your care about their well-being. Generosity during a crisis can make a relationship far stronger.

Small businesses are facing unprecedented struggles, and banks and policymakers must step up to help them. For example, banks and policymakers need to make sure to create a clear and credible set of guidelines for businesses. They can eliminate uncertainty about getting a loan and offer clarity about rules surrounding loan forgiveness. We’ve heard large banks assume that inbound requests are all they need to worry about, but best pointers  indicate to a need for more outreach and relationship building with small businesses for them.

Yet, there are also steps that small businesses can take to make sure they are doing the best they can given the situation. To navigate the current crisis, it is necessary for owners and managers of small businesses to act both with a sense of urgency and with prudence. It’s important to understand the broader landscape. And it’s critical to be aware of the potential for avoidable mistakes in decision making in these situations. By taking stops to avoid such mistakes, and by thinking through the broader set of levers available right now, it is possible to navigate this complicated landscape.